Panel Discussion (2011) - Panel 'Demographic Change, Economics and Politics': Peter A. Diamond, Sir James A. Mirrlees, Christopher A. Pissarides, Edward C. Prescott (Chair: Martin Wolf, Financial Times)

MARTIN WOLF. So I will get this particular show on the road right now. I’m Martin Wolf from the financial times, I have the honour of moderating this session which is about, it’s quite a strange title actually, “demographic change, economics and politics”. And while I consider all these 4 gentlemen really extraordinarily brilliant, I had never thought of them as extraordinarily brilliant on politics. But we are going to find out that that is wrong. Just to start off, I was thinking about this title for this session and its one almost superlative example of the capacity of humanity to turn its greatest triumphs into a source of immense angst and fear and terror that we have succeeded in turning the two of the most wonderful and revolutionary processes of our age, namely the reduction in fertility which is largely a consequence of the decline in infant mortality and the liberation of women on the one hand and the aging of the population, which is the result of staggering successes in terms of public health and private health. So we have really solved two of the greatest curses of humanity in large but not of course in complete measure, but even in developing countries life expectancy has gone up at an extraordinary rate, much more quickly than in the developed countries at comparable levels of income per head and fertility rates of collapsed at quite extraordinary degree, there´s extraordinary statistics on this. And we have succeeded in turning this into something that we are desperately worried about because it is going to ruin our world. So this is I think the setting for this discussion. I hope, and I think I’m reasonably confident, that we will have a relatively balanced presentation of these issues and at the end perhaps people will feel that we can survive perfectly well in a society in which we all live and I fervently hope you all will live to be at least 100 if not longer than that, which means among the young economists here, since you're not going to be able to retire, of course, you have a working career of 70 years or so in front of you and therefore I hope that Peter Diamond’s remark, when he gave his presentation before lunch, that people tend to run out of ideas as they get older, does not in this case turn out to be true. I’m not going to - I think - to introduce the panellists because I really do feel that everybody should know who they are. The way we’re going to follow this, I wanted them to express their views, rather than have a very focused presentation, I want these people to say what they think is important about this. Each of them is going to speak for 10 minutes, then we’re going to have a debate amongst us, and I want to encourage them to point out really the worst ideas they’ve heard from their fellow panellist, I don’t want any of this exaggerated politeness that otherwise people feel towards Nobel laureates, because if they can’t be rude about Nobel laureates, who can? So we will do that. Then, I hope, we will have an exchange with you and I want some really clever questions. We will follow the sequence that you see here, there is a reason for it, which you can work out later, for this sequence. It´s not alphabetical, and as far as I know it´s not in order of age, so as a person with a name that starts with W, I am very, very aware of the dreadful sin, form of discrimination, never made illegal of what I refer to as alphabeticism, so I’m going to avoid this. So we start with Peter Diamond, for your 10 minutes. PETER DIAMOND. Thank you Martin for freeing up some of my time because I don’t have to talk about how wonderful this is. The demographic developments are not anything new, you see here a chart with estimates going back to the Stone Age, this is the fraction surviving in a cohort of different ages, and as you see we’ve had a steady progression, nothing new. And even if we merely take the last century, we see, world wars apart, this glowing set of improvements. So the issue is why is this a crisis now, why are pension, and I’m going to start with pensions, I’ll get to health second, why are pensions an issue now? Well, I think there are two reasons, one reason is the baby boom, for those countries that had them, and it´s important to keep in mind not all countries did, which doesn’t affect this trend but affects the speed of the trend. And the second reason is for a lot of this time of steadily improving mortalities, we did not have large pension systems and the places we have the most trouble is large pension systems that make no adjustment for life expectancy. Then that creates a trend-cost problem which has an obvious answer, which is adjust it for the trend, the anticipated continued trend in improving mortality, and if it’s designed well in terms of retirement incentives, it will have the effect of people retiring later. You live longer, you’re healthier, morbidity is improving, the number of jobs that you can go on doing well into what is past, beyond past retirement ages, I think is probably growing, although I do have to refer to my sons for dealing with new electronics. One of the Boston Globe columnist suggested there be a panel of 50-year-olds and you couldn’t market any electronic device they couldn’t figure out how to use, that’s unlikely to happen but the jobs that are so heavy on physical strength and mobility, they’re a shrinking part of the economy. I think its worth keeping in mind there’s no guarantee that mortality will go on improving and it´s worth keeping in mind that at the same time people have been living longer and longer, they have been working less and less in all of the advanced countries. We’ve shortened the work day, we’ve shortened the work week, we’ve shortened the work year, and, as you can see here, we’ve got more and more people at all of the ages out of the labour force. There’s the labour force participation rates of men of older ages, the story for women of course is this mix of more women having careers and so going longer, combined with some of the same factors with the men. And if you put together these very long trends in life expectancy and in earlier retirement, what do you get out of that, what could be driving this? Well, pension systems, the incentives built in to them do matter a lot for when people retire, but these trends go on well before there were such systems or well before they were large. So to my mind, what we are seeing to a large extent is an income effect, people have gotten richer on a lifetime basis, people have better opportunities to save and they’re taking it out in all the ways I already listed and I don’t have enough time to repeat. So the solution to the pension problem is really very simple, fix the pension system so that it works for people to work longer when they’re going to live longer and make it automatic. That is the economics, which is simple. The politics is not quite so simple, because to do something along these lines, you’ve got to reduce benefits or increase contributions relevant for a low tax country like the US, not here in Germany where there’s concern. Germany has made adjustments for the ratio of elderly to young, so there are automatic adjustments in there, and it´s aimed at not raising the tax rate, which is vastly higher than in the US, different things for different countries. It’s all doable, how do you bring it about? Well, you either need something the public will recognise as a crisis or you need something that politically the different parties are willing to work together and it helps to have a political environment where people are used to doing that, a country like Sweden, unlike the recent US history. The fertility side, there’s the baby boom, you see it’s a big deal, the total fertility rate has been dropping, the impact on pension systems and the economy is not nearly as large as that drop suggests, because the decline in child mortality means that the fertility rate adjusted in this case for those who reach age 10 was never so large, and the declines have been a lot smaller, the baby boom shows up the same, it’s a different story. The baby boom is really speeding up this old age dependency rate because we’re getting such a drop in births relative to what we had before, it’s a large swing, it calls for a more rapid response, it gives the sense of crisis that Martin referred to, that wouldn’t have been there with the slower moving element. So economics is simple, pension systems are money in and money out, a decision of how much funding depends on basically the intergenerational considerations readily captured in an OLG model, piece of cake, perfect thing to be doing in the current environment, because everyone agrees the pension system should change slowly so people can adapt to it. That means for example if the US were to put its social security system on a balance, so the trust fund doesn’t hit zero in 2036, which would call for 25% cut in everybody’s benefits, there would be a great drop in the trend debt to GDP ratio and no impact raising unemployment now. Health is a different story, health is obviously affected by demography because we spend considerably more on the health care of older people than younger people and that is likely to continue. But as this picture for the US Medicare program, which is just for the elderly, shows, the aging in the US is a small part of the total cost growth picture and this is not just a US issue, here are the estimates for a whole bunch of different countries, these are older slides, I didn’t succeed in finding some more recent ones. So what else is going on in health that’s different from what's happening in pensions? The answer is we’re having a great deal of technical change going on in the health area, bringing in all sorts of wonderful new ways to spend money, many of which give people better lives, not just longer lives but I think its important not to focus just on mortality, but also better lives. And the demand for these are very large, so that generates two issues. One issue is, can we change the R&D incentives? So we’ll have more attention to doing the same thing cheaper and less attention to where the big bucks are right now, which is doing something better or doing something that wasn’t done before, we need that other R&D piece. And the second aspect that comes in this is, there needs to be an adequate form of rationing, whether you do it by price, whether you do it by rules, whether you do it by queues, so that people don’t actually get the care because maybe they die first or they’ve got some other problems, some forms of rationing are absolutely essential, there is really virtually no limit in the demand for medical care. My own attitude on this came from reading Eliot Freidson´s thesis in the ‘50’s. and he was interviewing somebody in the Bronx, which is where I grew up, part of New York, not the richer part of New York and he asked this man: And the man said: and I would say ‘fine, thanks.’”. So we need a rationing device, we need to address R&D but we also need to recognise, particularly in the US we have a stunningly inefficient system and we know some fixes now, but largely we need research, experimentation, evaluation of the experiments, so we can figure out how to make it less costly. Shifting costs from the federal government to state governments and businesses and people, that will help the federal budget, it won’t help the American public. MARTIN WOLF. Thank you very much, Peter, I wanted Peter to go first because I think he’s given us a wonderful series of data points. And I have to say, though I attend many presentations and have given many myself, I can’t remember many charts in which the second set of data points were for Greece and Rome, so for that alone I’m really, really grateful, he didn’t date the Stone Age which is very disappointing, are we talking Neolithic or, never mind. Chris. CHRIS PISSARIDES. Martin was kind enough to give alphabeticism and ageism as the order of the day, but I don’t know what system he devised, but I still come after Diamond, it’s probably America before Europe, is it. But we’re going to find out soon, because what I’m going to say in fact turns out to be a very similar message to what Peter Diamond was just talking about, but is applied to Europe rather than America and I should say that you might get a feeling of déjà vu when you see this, that’s because I got a little bit carried away before lunch and I said things that I thought I was saving to say in this panel here, but anyway here it goes. Now, working age population is falling both in Europe and America, but more in Europe, again my data from the Eurozone is consistent with what I was saying before, it considers starting at some time 1986, we had a trend decline in the working age population. Now suddenly, now the population, I’m showing it to you there to show you what demand there will be for services to be provided by the working age population, but of course, as I showed you before in the hours of work, we’re on a decline in Europe as well. So what this is showing you is that you are going to have a smaller number of people or, if you like, smaller number of hours of work to provide for bigger needs, or demands. Now the hours in health and social care, which includes the doctor who calls by just to ask you how you are and you say very well thank you, that’s a social care rather than health, are rising in Europe, but not as much as in the United States, the United States the top is the red line, the Eurozone is the blue line. This is actually hours per week supplied by each member of the working age population if they were at work, so it’s like using the working age population as the deflater for the total number of hours. So in 1970 we provide in Europe 1 hour a week for this kind of service, in the United States it was more like 1.2, by 2006 and 2007 the United States are providing 3 hours a week, it´s almost triple what it was before, in Europe were somewhere 1.7 or somewhere like that. Now interestingly, though if you look at the share of hours of work that go into health, then those are about, they stayed about the same in relative terms, Europe and America, the share of hours has been rising in both cases, and rising at the same rate, and therefore, what you might say from this is that the reason that in America they supply more hours of work on health is that they are increasing the total number of hours of work a lot more than we are in Europe. So in a sense the fact that total hours of work and especially hours of work by those in the labour force are falling in Europe, it’s affecting the demand in the health sector, we’re not providing for what potential demand there is, just because the hours of work are not there. And I think that’s why the level of hours overall, ever since 1970 in Europe has been below the US. Now, my main interest and the reason I said that it would be very similar to what Peter was saying, or at least how he concluded, concerned the financing. Now, in the US, of course, the bulk of financing of health care is through the private sector, people paying for themselves some way or another, and there is a rising cost and it´s become very expensive, as we know, to get medical care there, in Europe there is a very heavy subsidisation by the public sector, they’re essentially public services, the health. So the question is, what should we do about financing? And especially in light of the rising debt burden that doesn’t look easy to bring it down. And one of the areas that would be effected inevitably will be health because it’s such a big claim on public finances. So how do we deal with health financing given that public finance as a whole are in such a bad state? So obviously something needs to change, we cannot carry on in the same way as now and really I’m posing that, I guess the three final bullet points or three questions, because I wasn’t absolutely sure about the answers. And I guess I can give you my view on each one of these and then we’ll take it up in the discussion, if possible, one of them is, should there be more private sector health provision with higher cost to the individual? Answer ‘yes’, I think. That's where the rationing of Peter’s would come in and I agree entirely with that, I think it is going to be essential for us in Europe as well. What I mean by rationing, I don’t know if it’s the same thing as Peter meant, but what I mean is that public, the public provision of health insurance should be rationed very strictly and then any additional provision should be rationed by price, public provision of course cannot be rationed by price, you know. So there’s got to be some way that we define needs within the - needs and means to pay for, it if you like, and then the public sector provides, up to a certain point, you know it pays you to keep you alive, if you like, or to do the major operation, but then it doesn’t pay for the recuperation and it doesn’t pay for the doctor who comes and visits you and says how are you, very well thank you very much. You know, that price might be used as a rationing mechanism for that, but something other than price is used as a rationing mechanism, up to a certain point. Second question is, more taxation to continue the same level of public sector support? I think the answer is ‘no’, because taxation in Europe is reaching levels where there are strong disincentives coming in, even countries that are traditionally regarded as low tax countries like Britain for example, now, marginal income tax rate is 50%, the consumption tax rate is 20%, there is a social security tax which is, to the individual, not the companies, about 6, 7% I think, you know, how much more can it go before you have the strong disincentive affects and have every company leaving and going and establishing themselves in BVI, in the British Virgin Islands or something. And the final question is, should we go for private health insurance, how do we avoid US problems with private health, I understand that private health insurance is no longer very common in the Unites States, at least that’s what Ed told me, if that’s the case, I don’t really know very much about the American system. Forget the second part of the question, do we go for private health insurance? I think, yes, we should just, once we agree that the public should bear more of the cost of their own medical care after a certain ration point by the public sector, then insurance markets should be free to develop if that’s going to be the case, but there should be some regulation to avoid the moral hazard that comes with private insurance and then its impact on cost. Now, how you do that I don’t know, it’s more like thinking aloud now that I’m talking with regard to this last point, but I opine it obviously for discussion if you take it up. Thank you. MARTIN WOLF. Thank you very much, that certainly set out one of the questions I will be asking later, which is, how do we go about thinking about the optimal structure of health insurance and provision systems, I think it’s the biggest single issue. Chris asked why I’d chosen to make him second after Peter, of course it had nothing to do with the alphabet, you were, as it turned out, as you pointed out doing a complementary, largely complementary discussion of the US and Europe, but you didn’t start in the Stone Age, so obviously that’s where we had to start. He would have destroyed us. Now, I’m going to do something which I shouldn’t do, but it´s as a sort of moderate personal autobiographical interest, Jim Mirrlees is, apart from being an incredibly distinguished economist, he has a number of failures on his record. And one of the failures on his record is me, he is really the reason that the world was saved from having, let´s say 100th rate theorist because he was, he just came to Nuffield college when I went to be a student there, having done a pretty shameful degree at Oxford, PPE, and before that I was a classicist, this is why I’m interested in Greek and Rome. And I attended one of his lectures and it took approximately 5 minutes, actually I’m exaggerating, it took 30 seconds for me to realise that if this was modern economic theory, that wasn’t me. So Jim turned me into an economic journalist and for this reason I’m incredibly grateful to him. And I think a fairly large number of students at some unbelievably undistinguished university should probably be very grateful to him, too, because I would have tortured them. So I’ve admired him enormously ever since as one of these people who is able to think about things in ways that I can’t even begin to imagine. So, Jim, it´s you, you’re on the podium. JIM MIRRLEES. This is thinking about things in ways that we probably shouldn’t quite imagine. Martin didn’t have great insight into what I was going to do but I regard this as an academic occasion so I'm going to sketch some rather academic economics. I’m going to talk about optimum population, many of you might think that’s a rather strange subject but there is, as I remember it, a chapter in James Meade´s Trade and Welfare, which sadly probably few of you have read, although it’s a very fine, perhaps even one would say great book in economics which deals with optimum population. Why might that be something we would sensibly talk about? Well, as you’re very well aware, there are many people who claim that the solution to the world´s problems, whether it be climate change, poverty, peace and war, you name it, the answer is to reduce the world´s population. I have sometimes thought of this as an example of the big principle, beloved particularly of military strategists, of the indirect approach, that there’s something really clever about solving a problem by coming around from the side with something unexpected which will just get it right. Nevertheless I tend to be a bit sceptical about that although you’re going to see that my conclusions are not really sceptical about it. Where does this idea come from? Well, it must be roughly that people think it would be a good idea to maximise real output per head, but real output is really a very long run kind of concept and includes things like the state of the environment and all that, and per head is somehow or other thinking of the totality of people and I really think that means overall time. Others, of course, and this is the current debate, not only in the developed world that you’ve been hearing about, but even now in China with the new census coming out, people are putting a lot of emphasis on the fact that the working population is rising much less rapidly than the population and that there are, of course for exactly the same reasons as in the west, plus the big reason of the 1 child policy, but there are going to be a lot of older people who are quite likely not to be working. And a lot of people say that the smaller proportion of workers in a declining population is bad and they’re inclined to draw many conclusions from that, say there’s a problem that’s got to be faced in terms of financing and all that which you’ve heard about. An obvious other solution which a lot of countries are thinking about, is that you might try to do something about the low birth rate. And one reason why it´s worth thinking about this question of optimum population, despite all its difficulties, is that indeed population does come into policy, there are countries that have introduced particular subsidies for that reason, France and Russia as I learned last night about Russia, certainly have financial subsidies whose intention is to encourage people to have more children than they otherwise would have. Not only that but the possible advantages of education, particularly education for women, particularly in developing countries, are often argued on the basis that this is a good way of getting the rate of population growth down, and indeed in due course reducing the population. Now, at this stage in the discussion you might perfectly reasonably think that, faced with it in this kind of bold logic, that you're going to have to say well gradually, we just get the population of the world down to 1 or 2 because there are bound to be diminishing returns, because there exists certain fixed factors of production, natural resources, land and so on. Well, think about it, I wonder what you do think about that. The way of discussing it, the way Meade discusses it and certainly the way I would like to discuss it, is to talk about optimum population using utilitarianism, using the sum of utilities. And this is in a context where utility really does have to mean some kind of quantifiable happiness, excitement - enjoyment is perhaps a better word in many ways. The simplest of that is just to say utility is function of consumption, but plainly you don’t expect me just to keep it as a function of consumption, or consumption per head rather, but also we’re going to have to bring the number of children into that, aren’t we, at a minimum. Which of the two obvious maximums should there be? Is it utility or should it perhaps be total utility? Certainly when utilitarianism was first expressed, you say it’s the total enjoyment in the world, and it looks as though having more people at a particular utility level may be rather a good idea. Bob Aumann and I were just having a little discussion this morning about the desirability of biodiversity, and I feel sure, and Bob will say if this is wrong, that this meant that he thought more polar bears was better, not only that having at least one polar bear was a good idea. And I think that’s generally true, people looking at the issue of animals tend to go for N times u of c, but I’m going to go for the average, in some sense it´s democratic, it´s what I would expect people if they thought about it to be in favour of. So what does that come to, it comes to the total utility over all time and you’ve got to divide by the total number of people over all time. Well, there can be no question that the number of people over all time would be finite, of course. But you also think that it’s going to be a pretty large number. But I feel this is unavoidably the welfare function to use for this problem when simplified as I’m doing. And by the way, this utilitarian formulation, and indeed Peter referred to this already, I didn’t know he would, gives an easy argument for redistribution between generations. It’s important to realise that in an overlapping generation model, that you only in exceptional cases get the answer that the equilibrium comes out to be the utility maximising answer. And indeed with what appeared to be realistic assumptions and a sensible kind of welfare function that you want to redistribute from later generations to earlier. There isn’t time to go into the implications of that, I want to really concentrate on the population change issue. Well, utility should depend on the growth rate of the population for the reason I already mentioned, pleasure of children, which, by the way, I suppose I cannot help but avoid, having just been visiting my grandchildren, the sense that children get more out of life than perhaps we do as we get older, ut primarily we mean that people take pleasure in having children, and this should surely be counted, that is a reason, it´s presumably very important in people’s decisions whether to have children or not. I’m not saying that that will necessarily lead to the conclusion that people on average, certainly not everyone will want to have at least two children, but at any rate functional dependents must be that. But also because of the worker population ratio, a faster growing population will have a higher ratio of workers to population and therefore that increases the output per head and therefore utility. So what would we get? You may think that this is a pretty difficult problem, actually conceptually it´s an awkward problem and some of you might have fun with this, it’s a bit delicate because you naturally want to think of this for extremely large N, you’d like to be at T, you’d like to go to infinity. So you’ve got to do a special kind of definition of what you mean by maximising something like that. But if you do, you’re going to find that indeed N should turn to a constant value usually. And not only that but because such long time is involved, you're going to be concentrating on long run utility and you would want to maximise that. So in other words you really do want to choose your N, you see what this implies, you’re already getting something quite powerful, zero change, zero rate of change in the population, and then that means you're down to maximising output per head. Now you notice that’s probably not, there’s no reason why people should, without any tax subsidy policies or special education or whatever, no reason why people should choose a zero-rated growth of the population. So that must make you think, um, there is a real policy issue here. And the other thing which I haven’t mentioned here particularly is of course that you move gradually from where you are to that level, and if you were to discount utility, apparently a lot of people feel that’s the right thing to do, then what I just said about maximising you is not correct, and indeed the long run level does depend on the dependents, on these growth rates. And in that case you’re going to have something higher if the worker ratio matters a lot, and it can be lower if children numbers matter. Well, no time particularly to go very far on this but it´s clear, a major question now is how big the maximising level of N is, nd as soon as you think of that, you think um, this surely is a local question, not to be thought about for the whole world, and you ought really to have someway of evaluating variety. When I think about this, I think about questions like just how good is the best artist and the best composer going to be, and that pretty much depends on the total size of the world population and also local population. These are things on which facts are needed. And I think one should therefore be rather unhappy about people just saying ‘oh the right thing to do must be to reduce population’, that could very well be right but there ought to be a more careful calculation of the whole thing. I would guess that a variety of population densities around the world is really optimal. That’s all that there’s time for, thank you very much. MARTIN WOLF. My strategy in this, in allowing the laureates to talk about whatever they wanted was based on the assumption that this is the best search strategy for finding rather strange questions answered in very interesting ways. And I didn’t expect this question to be asked, I should have though known it was you. And it is a very, very interesting, abstruse question, but of course at the same time unbelievably important. Ed Prescott. And we will come back to it. ED PRESCOTT. Let me begin, a lot of my theory always starts with facts and sometimes deviations from theory. One thing we do know that government debt is growing relative to GNP, that’s not only in Greece and the US and Germany, some European countries are now facing a sovereign debt crisis and there almost surely will be defaults, almost probably one. World real interest rates are low, it’s not good for the foundation here. Why? I say it’s a demographics, aging population and falling number of workers per retiree. In the aggregate the need for places to save for retirement relative to GNP has increased. As one accounting identity, Total Private Savings equals the value of Private Equity - the businesses, the households own and now they have non profits in there - plus Government Debt, borrowing and lending between people net out, some country for a while, Germany was not causing too much trouble, but what were they doing, they were, West Germany was shipping money to East Germany, but later then they had to start shipping it somewhere else, so they bribed the Greeks to borrow from them. Everybody cannot save abroad, the Norwegians have a huge, but that’s a small country, money elsewhere. In the world as a whole, borrowing and lending between countries, zero net supply. What's the problem with government debt? Time inconsistency problems: governments all too often default on their debt. I think since Greece was formed, somebody told me today, Greece has defaulted 19 times, that’s even better than Argentina. By the way, the US in the last half of the ‘70’s had a lot of unanticipated inflation and reduced its effective default on government debt. That's when the debt to GNP ratio in spite of big deficits got to the lowest it´s been, at least since 1930, it went down about under 20%, in 1933 it was 30%, in 1962 it was 30%, in most of the last decade until recently it was 30%. This is private debt held by the interest bearing. Ok, Western Europe also did some defaulting. The pension funds had a lot of money then, the governments told them hold within government debt and then they inflated much of the value away. The question, is there a solution? If governments could honour promises it’s easy, they just issue the debt, we need, that follows from Samuelson’s use of Allais´ overlapping generations model. The question is, without a lot of government debt which governments can’t honour empirically, is there a solution? The answer is ‘yes’. What is that solution? Get rid of all income taxes. That’s not all taxes, it wouldn't affect the size of expenditures, what I’m proposing, in worked out explicit dynamic equilibrium models with huge number of generations in the transition path, using the super computers, or actually 2000 of them. The US has virtually tall consumption tax already, its personal income tax is to a first approximation of consumption tax, these are changes that occurred over the last 40 years. Most people can defer receipt of income and payment of taxes to when they retire and consume. How do you do it? You use the same federal income tax form. What do you do? All savings, deduction from income, all withdrawals from savings added to income. So this consumption tax, then the US taxable income is equal to consumption and so, whether you call it consumption or taxable income doesn’t matter, it’s a consumption tax. If you tax when you earn and consume at that same time, labour and consumption tax are the same thing. There is some things if you get into finances, value of businesses, I call it equity, is much less than the value of productive assets, K, K for capital. q is defined to be the ratio of those two numbers, these are market values for businesses. One of the businesses is, that a lot of people were in, is, they own a house and rent it to themselves, they’re household businesses and they’re important sector in the US economy and in many European countries. Now, eliminating income taxes, I propose, would increase K, from about 5.7 GNP’s to 7.1 GNP’s. It would increase the value of q from about 0.6 to 0.9, these two effects dramatically increase savings opportunities, that’s what we need, we’re desperate for that, government is providing all this debt because people want a place to save, but they can’t sustain their promises. And this increases the savings opportunities from 3.4 GNP’s to 6.7 GNP’s. Now, the increase in K is well known. By the way, without the change in the tax system you could have more capital accumulation, but there’d be a problem of the over capital accumulation that Phelps did that important work on in the ‘60’s. But my K number and Ellen McGrattan, she’s guilty too, is much bigger than the standard ones you see. It includes 1.7 GNP’s of unmeasured intangible capital. And the entrepreneurs here, generally when I talk there are, but a lot, a big chunk of many businesses is intangible capital, hings you can’t touch, tangible means touch. These are the things you capitalise, intangible you expense, R&D, training young workers, that is partially financed by the businesses, that’s a big one, advertising, building a brand name, building an organisation, these investments are as big as investments in tangible capital, factories, vehicles, inventories, office furniture etc. Now, the thing is the increase in this, I call it q in the tradition of Tobin, maybe surprising. You know, in the United States intangible capital, big investment, it’s over 10% of GNP by the private sector, it’s as big as tangible investments, the eye in our macro models. The government finances half of that in reduced tax liabilities, you expense this. The government gets half the return so they’re half owner. If you had a tree in your backyard bearing fruit and there’s a tax of 50% on the dividends, the government owns half that tree and you own half of that, and if you want to sell that tree you’d only get half as much, it really comes down to that. A Norwegian explained that to me. Why q increase? Well, I’ve discussed some of this already, it’s that expensing of intangible capital. In the great big hours boom, in the late ‘90’s in the US, the high tech one, what happened to corporate profits? Down. What are corporate profits now in the US? High. We’re not investing in this intangible capital as my hypothesis says. There’s some bits and pieces of data supporting that, in time we’ll have much better data to do more careful analysis. But McGrattan and I found that intangible investment was huge in the late ‘90’s, the dotcom revolutions etc. Students were just dropping out of business school, why? Well, people like to get rich, they want to become entrepreneurs and many, many did become highly successful entrepreneurs. That completes what I had to say, thank you. MARTIN WOLF. Well, the presentations are interesting in the sense that they seem to me to cover the four big aspects of this topic, if you were to think about them. One only tangentially, the first topic, which is what Ed has been addressing, is savings. How are you rich enough to afford all these people who aren’t going to work. The second topic, I’m not saying in order, is the size of a population, which is essentially the whole demography, and what it ought to be, and that was raised by Jim. And then we had discussion of two very, very specific and central policy areas where the public and private sectors interact in very profound ways, namely the pension system and the health system. So, actually if you paid the attention that you certainly have paid, you’ve basically got the answer to everything. Now, what I’m going to do is then sort of discuss a little bit about these specific issues that have been raised and I’m going to start by addressing a question, I think to Jim, because you’ve just completed the Mirrlees review I think of the tax system of the UK. I’m pretty close to 100% certain you were involved with the Meade review, is that correct, you weren’t involved with the Meade, ah I take that back. Anyway one of the big issues, of course, is the expenditure tax structure and the taxation of savings which Ed has addressed, so Ed has basically said, well, if we shift fully to an expenditure tax structure, I hope I’ve got this right, we will have extraordinary increases in wealth and the valuation of wealth, and that will solve an enormous number of problems. Particularly when right now the private sector is desperately looking for good investment opportunities and the best opportunity, this is something on which interestingly, from a completely different standpoint I’ve been writing about a lot recently, the only good investment opportunity they can find is to buy the debt of bust governments, which is a very perverse situation, I think that’s true. Indeed it is the most perverse situation imaginable. So how far would you go with Ed’s solution to the savings and wealth problem in the tax system? JIM MIRRLEES. I think not very far, although we are going for essentially an expenditure tax as well. MARTIN WOLF. Do you agree with the answer, the policy answer? JIM MIRRLEES. Your question was whether it could have an impact, and that seemed to me implausibly high, but I need to think about it more, just having seen it, we certainly hadn’t thought it would be that big. And of course it´s not entirely true that people are only investing in bust governments, they’re trying to invest in emerging economies too, I don’t know what the relative magnitudes are, but... MARTIN WOLF. I think net, the developed countries net are capital importers, not capital exporters, now the structure is of course complicated, because people are purchasing real assets in emerging countries and taking, and the emerging countries are buying out government debt, so that's generous on their part, but I mean the net basis, beyond Ed's point, obviously, that we don’t do a great business of investing in Mars, we are not in aggregate cumulating claims on the emerging countries, but our private sector is, that is true, our private sector clearly is. Peter, would you like to comment a bit more about the tax dilemma, I know you’re also into the tax business along with labour research and everything else, so tax structure in the US and expenditure tax. PETER DIAMOND. Well, let me focus on Ed’s thing rather than getting into nitties and gritties, which is where a lot of the fun is. I believe that optimal tax theory says unmistakably, there ought to be positive taxation of capital income. I have a piece with Emmanuel Saez that will be out in the fall, journal of economic perspectives. It´s already on our web pages, and it lays out a variety of arguments why zero is the wrong answer. It doesn’t, because I don’t think the theory has gone far enough, come up with a right answer, but why zero is wrong. Now, looking at public debt, I don’t have anything on Greece or Rome or the Stone Age, but if you look at US debt-to-GDP ratios, since the beginning there’s a constant pattern of it shoots up in wars, including the one before we were an independent country, it shoots up in recessions and depressions and it trends down in between, not every year, but it trends down. That turned around approximately 1980. And it partly turned around because one of our two political parties decided it was a good idea to run up a whole lot of debt as a way of influencing future government policies. So I don’t view defaults in the US, I won’t say anything about Greece because I’ve seen that same element, there’s a more striking way of putting it. If you count being in default, there’s still some debt outstanding that you’re only making partial payments on, then Greece by that definition has been in default half the years since they got independence. It’s an odd definition. Anyway, I view the issue of what that debt can do as something that can be handled if, and we’re not political scientists or politicians, we could get that sorted out. Secondly, if you look at a pay as you go pension system, that doesn’t have debt its selling to people who are being fooled, but if you set it up appropriately with attention to demography, it is a substitute for the need to save for your own retirement. So I am sceptical about his initial premises, despite, and this may shock people, the ability to link Ed Prescott and Ben Bernanke in the same sentence, because they’re both focusing on a savings glut, Ben was looking at it as an international problem, particularly the lack of the kind of assets that some people want, being produced in third world countries. Ed was looking at it as growing saving out of the demography, but, as I indicated, that demography has been going on for a long time, so again, I don’t see why that becomes an issue right now. MARTIN WOLF. Ed, you are... ED PRESCOTT. The first thing, optimum taxation. Ken Arrow says there’s no social welfare function, you can argue with Ken, second thing is... PETER DIAMOND. Can I argue with Ken? MARTIN WOLF. Not now, first of all he’s not here. ED PRESCOTT. There’s a theorem in public finance due to two distinguished, Diamond and Mortensen it happens to be, don’t tax intermediate goods, and to tax capital income is the tax on intermediate goods. PETER DIAMOND. Another error. ED PRESCOTT. Capital is produced, it provides services over its life, a number of intermediate goods. The next point, you do the social, so that’s inefficient, but some of the key things is that to tax intermediate goods, inside the production possibility frontier, that was a major development in public finance. Now, the next thing is, well, different dictators have, Arrow did say you can’t have a social welfare function if you have a dictator. Otherwise any kind of debate with Samuelson, and Samuelsson crawled away from that one, people from MIT don’t quite agree with that and I don’t think Ken Arrow wanted one, it´s what the economic reasoning led to. MARTIN WOLF. I was going to say that I take it back, that actually I was pretty sure we’d end up here, that there wasn’t going to be any politics here, because we’re beginning to realise, I’m sure you're all beginning to realise, if you’ve paid attention, that this is why the American congress finds it difficult to agree on anything. So, Peter, I will give you the last word on this, we will come back to it later, we may be able to come back to it, but why is the Diamond Mirrlees result not applied to the taxation of capital, which is a pretty fundamental result in tax theory? PETER DIAMOND. The theorem is taxes between the production sector and households are allowed, taxes that move you inside the production possibility frontier by taxing intermediate goods for example or taxing different firms differently are not allowed. The taxation of the income of households moves you along the frontier consumption today-consumption tomorrow, it does not move you inside the frontier. So it is not an implication of that theorem that you don’t want to tax the capital income of households. Now, some of that you may collect indirectly through a corporate income tax and it’s very easy and universal to set up a corporate income tax that does move you inside the production frontier, but it’s not a principle about taxing capital income. MARTIN WOLF. Could you ask you, Jim, a question, since you used the very big social welfare function to infinity, I was thinking about the idea of optimising population to infinity raises many interesting questions, so you reject the Arrowian critique of the impossibility of social welfare function. JIM MIRRLEES. Yeah, it’s a theorem about what's possible if you use a restrictive set of information, not an implausibly restricted set, it’s saying if the only information you're going to use is the preference orderings of people, then you're going to find it essentially impossible. So I think the implication of that is you’ve got to use some other information like what rewards people get from particular activities and that's tough, of course, and not surprising if we have quite a lot of disagreement about what's the way to express that, it all sounds more paternalistic of course. MARTIN WOLF. I think Ed might describe it as a dictatorship. JIM MIRRLEES. No, it´s not a dictatorship, unless only one person gets to decide which function. MARTIN WOLF. Maybe an oligarchy. Chris. CHRIS PISSARIDES. I wanted to ask you a question actually if I could. MARTIN WOLF. That’s against the rules, all the rules. CHRIS PISSARIDES. As someone who obviously knows the British scene better than any other, we’ve had tax free savings instruments in Britain for the last 20 years at least, and they are quite substantial, have they had a big impact on savings, I don’t know of any evidence myself but, maybe you would be better placed. MARTIN WOLF. Jim may well have looked at this, the evidence, I understand it, is that in the UK case, you’re referring obviously to things like ISIS. The effect on the savings rate has been negligible, my understanding of the literature, empirical relations between incentives and savings rates is that the results are not very powerful. But in this particular case, I think it’s very, very clear, you could argue that that’s because they were limited in certain ways and certainly, but in some ways we are, I think Ed made this point, a number of countries are quite close to expenditure taxes now, I think you made that point in your notes. CHRIS PISSARIDES. Yeah, well, that's why I find the impact on your q and K as being extremely high, given how close we are to expenditure tax. MARTIN WOLF. It´s clear that when you publish this work that you are going to... ED PRESCOTT. It did lead to an increase in the, it’s more that E thing, the q, the capital output ratio, at least the part we, the EA reports, the outputs stayed remarkably constant. So our savings is, it looks like balance growth to a first approximation. MARTIN WOLF. If Ned Phelps were here, he may be in the audience, he would certainly say ED PRESCOTT. Productivity is the driver, that’s the most important. MARTIN WOLF. Yes, let me just, one other issue before I go to the floor, there’s one other issue which I thought is a really big, rich and important issue, which came out very, very clearly at this debate from both your and Chris’s discussion, which is health. And here, interestingly, all the evidence which you both have is that the big driver is the cost of the health system, rather than the aging of the population, and which is consistent with what we know about the cost of looking after people. The US has an interesting mix system which seems to generate obviously at least extraordinary cost levels, there’s no doubt about that and very big questions about its effectiveness. Ok, I’ll start with you, Peter, and then others, if you had, you can have 3 minutes to redesign the health system, so that, because it’s the projection, as I read the data on the unsustainability of US public finances in the long run, there’s lots of this literature on this, this is really about the forecast of the future cost of the health system, it´s not pensions. MARTIN WOLF. It’s the main driver and people generate extraordinary results, the health system is 30/35% of GDP by 2015, it sort of looks rather extraordinary. And, Ed, I will certainly ask you, because I’m sure you have strong views on this, how do you fix the health problem, and then we’ll come to the European side, which is a different one. PETER DIAMOND. First of all, there are two separate issues. One is, how would you design a well run system, and Chris, I think you were way too narrow in the kinds of systems, interacting markets and government that you made on your list. The public sector can have a price on things that are provided, you know there are lots of ways to do it. Second question, how do you get a system which the US congress isn’t going to make a mess of, even if it starts off on a good track? Given the first part, there’s no question in my mind, you want a single system that covers the bulk, but not everything of what you should be insuring. And you want to allow people to insure, to cover what the system won’t. So there are experimental drugs, nobody knows if they will work, they’re not going to be covered by your national system, but if you would like to go by insurance, so that you can do some wildly expensive experimental drug, I believe in that kind of freedom. So it’s a 2-track-system, a basic and a supplemental, you need price mechanisms in both of them and that’s the ideal. Then the question is, if we reformed Medicare and made it available to everyone, would we succeed in doing a good reform or do we need a bigger role of the private sector which will influence the politics of how things go? And that also relates to the politics of how we get from where we are to where we might be. I proposed many years ago a system of mandatory group insurance, because individual insurance is wildly expensive for all sorts of bad reasons. But you can form groups and let the private market bid for them, the way the private market goes to my employer - or my ex employer, I retired July 1st - and get a mechanism of both insurance design and pricing out of that with government regulation, and whether that’s better than a Medicare for all fixed up, it´s not in principle ignoring politics, it may well be if you incorporate political issues. MARTIN WOLF. Ok, Ed, you’ve had the liberal solution, what's the conservative solution? ED PRESCOTT. There’s no answer but one observation that has a lot of food for thought, Singapore, same income per capita as the US, they spend ¼ as much on health care as the US. Their measures of health, life expectancy, infant mortality, the ones commonly used are better: I don’t know exactly why but this is a big difference and our system, I think our health care system provides great health services but way too expensive. MARTIN WOLF. It’s a consumption good, isn’t it? PETER DIAMOND. We both agree that the US system is broken? ED PRESCOTT. It’s in need of fundamental reform. PETER DIAMOND. Ok, that's what I mean by broken. MARTIN WOLF. Jim, did you want to say anything about, from the European side, and Chris raised these issues, and then I’ll give Chris the last word on this. You start off with single pair systems. So we have Medicare for all, effectively in one way or another in all European countries, also I think in Canada and all developed countries, except, it´s cheaper, in the sense we pay a smaller share of GDP, it´s rationed, clearly, there’s no question about that, in various ways. It seems to control the health cost inflation, and I’m not using inflation, I just mean increasing cost better, so public finances aren’t going to be ruined by that as far as we can see. But have you any views on how these systems might be reformed to deal with the sort of problems that Chris raised for the future? JIM MIRRLEES. On how the European system? MARTIN WOLF. Yes, if you start off with a public system, there is going to be increased demand for it, it will involve raising taxes in some way, not necessarily at an extraordinary rate, but clearly you can envisage the tax burden rising to fund it. Chris has suggested we’re reaching a sort of ceiling on taxable capacity, at least from a political point of view, how do you go about squaring that circle in the European context, this is the issue Chris raised. JIM MIRRLEES. Yeah, there’s partly this issue of trends which I don’t quite see why, but I bet it´s true that the cost will keep on rising faster than other things. We’ve observed in Britain that peculiar things can happen to the construction, the doctors, I mean medical professors I know, articularly in Hong Kong, say that the GPs in Britain are seriously overpaid and this obviously raises cost and is difficult to get back. So it just seems as though a lot of details of that kind make a big difference to it. I’m intrigued but still puzzled by these very big differences, Ed spoke of Singapore, well, Hong Kong is the same issue, and this is mainly a public health service, it´s awfully like the British health service, and is a lot cheaper than the British health system in a country with similar average income level and, from time to time, the highest life expectancy in the world. MARTIN WOLF. Maybe they just lead much healthier lives. They eat Chinese food. JIM MIRRLEES. We might say, copy it, yeah, that could very well be. Ok, here we get into ...so you want me to do a paper on optimum nutrition. MARTIN WOLF. Yes, next time, 3 years hence. Chris, last word. CHRIS PISSARIDES. I think the problem is that, and referring to what Peter said, I was looking at it too narrowly, is that I think the most fundamental thing about the provision of health by the public sector is that anyone, especially people without income, should be able to get freely, or at least publicly funded health policy, you know, it´s not good when society has people sick in the street and not affording to get service. So that you do need to provide basic health service for everyone which is funded entirely by the public sector. Then, when does the rationing begin? And that’s a very difficult question, I don’t know the answer to that. In Britain, for example, which is obviously a system I’ve experienced, I think the reason costs are high is that the governments for the last 20, 25 years have tried very hard to improve conditions and improve service in the national health service. And I think they’ve succeeded and as a result, so good quality service is available, completely free of charge to the individual, funded by the taxes. And I think that’s where the rationing should begin, people who can afford to pay for their health service, I’m including myself in that as a beneficiary, find that at least in the area that I live the GP’s practice is so good to walk into, it´s like any other, in any other private place, that I can just go there and get an entirely free service, however expensive my needs are. And therefore, you know, if you say where should rationing begin, I would say definitely at the level - I won’t say in public the area my doctors are, in case they get overcrowded - but I would definitely say at the level of the, that we seem to be getting in Britain, I think rationing should begin earlier, to keep the costs low, and maybe that’s why GPs are paid a lot to encourage them to stay within the national health service, and not go entirely private and provide this high quality, zero cost to the individuals. MARTIN WOLF. My reading of this, I’m not going to let you all get back in, but that actually there’s quite a strong case for making the primary interface close to free. CHRIS PISSARIDES. Yes, but where do you draw the line, that’s... MARTIN WOLF. There may be some excess use but you pick up an awful lot very quickly. And the biggest costs still are intensive treatment of people who end up in hospital. Now, I said, I’ve done very, very badly, so I apologise, but I said I would have time for people to ask questions, I’ve no idea where there are any microphones, we started 5 minutes late, so I’m going to take a few minutes later, but I would like to, since you’ve all been listening to what I’ve found at least a rather interesting conversation on these huge themes, for which the organisers are responsible, for both good or bad, does anybody want to ask a question. If they do, yes, just get up, say who you are and, it is a question, that’s something that ends with a question mark and is not more than one sentence. ZAIB DELIBAS. My name is Zaib Delibas. I work in Washington DC as an economist for one of the international financial institutions. The question is, just as governments have gotten away with technical default on their public debt in the form of inflating away the value of the debt, more easily than they have without right default, why is it not possible that they would do the same with their commitments on health care and pensions through lowering the quality, certainly in terms of for health care, lowering the quality of health care provided to people? Longer queues, you know, things like that. MARTIN WOLF. Ok, I will take, before we get to that I will take another couple of questions, so to mix them up, anybody else wishes to ask, there’s nobody concerned about the optimum, yes please, this lady, optimum population. BONNIE McDONALD. Hi, I’m Bonnie McDonald from Canada, postdoctoral student. With the ageing population that’s happening in a lot of developed countries, they’re trying to, a lot of governments seem to be encouraging savings on an individual basis rather than on an aggregate basis, so for example 401(k’s), RSP’s etc. And my question was that currently in Canada, recently they’ve introduced tax-free savings accounts, and you just mentioned that, but it seems to me that if you’re having a growing elderly population that already pay lower taxes than the working population, and now you’re introducing a tax-free savings account where they’re actually going to be getting now income in the future, tax-free, if that is actually a bad direction, politically, to be introducing the types of retirement saving vehicles, so basically you’ll now be having a growing segment of the population which will actually be receiving income now tax-free. So more tax for the working and less for the retired. MARTIN WOLF. That follows on our discussion earlier. Ok, let’s start with the first one which is, which Ed in fact raised, the many different ways for governments to default. Governments are imaginative institutions and full of, staffed with intelligent people, they can find usually many ways to default, other than actually defaulting, this is one of the neat things about the Eurozone, it´s gone back to the primitive world where governments just default. Chris, what are the clever ways of defaulting without defaulting? CHRIS PISSARIDES. Oh I can tell you many of those. MARTIN WOLF. Some of the people here work for central banks, maybe they need some advice. CHRIS PISSARIDES. The question really is whether governments should default, through longer queues, or whether they should avoid it. I think if we don’t do something about changing the finances of health, they are going to do it, there’s going to be this kind of default through long queues, appointments where you have to make appointments over long periods of time. But something has to be done to avoid that, because we know from basic economic principles that using the queuing system as a rationing system is not the best, even such a marginal theory will say that, I think. So the answer is that we should try and avoid it. MARTIN WOLF. I’ll give each of you a word on it because it´s a really interesting question, Peter, because the public finance issue was raised, Ed has given up, they’re going to default, now we’re going to discuss, when they default, how are they going to do it. PETER DIAMOND. The political process is a back and forth between politicians and voters. And so, particularly to take national health service and make it do a bad job is something, not surprisingly, the voters are going to notice. And that’s going to feed back into the process. So I think your scenario of defaulting by just lowering the quality of what you provide is not a politically viable one. There are other ways of course of reducing the quality of services being provided, the US has not been maintaining roads and bridges for years, you could view that as a form of default, I don’t think that was part of the conscious pattern in part, because we haven’t viewed this as a risk until fairly recently. But rather it’s the pull of different ways of spending the money being spent combined with the issue of it´s difficult to raise taxes, it´s difficult to cut existing spending, so without some push or something heroic, you get that tension and it will show up in quality and I think the question was very good and not maintaining bridges, when they fall down and people die, that’s an example, I guess, of defaulting. But it’s kind of limited, if we have too many people dying and bridges falling down, the public will notice and the political process will respond. MARTIN WOLF. Ed. ED PRESCOTT. The bridge in Minneapolis fell down (laugh), engineers at the university of Minnesota designed it. That is a problem, they set up these special health clinics under the Clinton administration and it was expanded under the Bush, people don’t hear about them, people don’t seem to like them, the quality of the services I think is what they complain about, when I talked to a couple of people who use that facility. When you have monopoly, it’s not always the most, and you don’t have that choice to go to some place else, often the quality of the services provided falls. MARTIN WOLF. Jim, the ultimate point here, which obviously Ed raised, is that there are incentives in the political system to make promises which in many states of the world you might find rather difficult to meet, but the people you’re making these promises to don’t know that, don’t really understand that. And then the time comes and you have to find some way of getting out if, that seems to be inherent in the political game and the question of aging, this sort of problem is everywhere. How do you fix that? JIM MIRRLEES. So far in most countries, of course the level of medical care people can get seems to be doable at the kind of cost that you would expect if they were having to pay for it directly as buyers, they probably pretty much expect. My guess would be that people would spend, probably spend more of their income on medical care, many of them, than they actually do in Britain under present arrangements. But I see no reason why it should continue that way, I can easily imagine a development of new medical techniques which would make it much, much more expensive. So I think that it’s really a question about what might happen in some states of nature, which we hope will not occur. It just occurred to me that home visits by doctors in Britain have become much rarer over my lifetime, and that seems to speak to the example of not coming along, it was just an automatic procedure. But in that particular respect the quality has deteriorated in a way that people have by and large not minded because actually it was of very little importance. That kind of thing can happen and there may be a bit more scope for that. I think we’re talking about something that could go one way, could go the other. MARTIN WOLF. On the other question, since Ed, you obviously raised the radical move to the elimination of taxation of capital. ED PRESCOTT. Of income. MARTIN WOLF. Yes, well of income as opposed to expenditure, as I understand it. ED PRESCOTT. Yeah. MARTIN WOLF. I won’t get into the question of whether they’re different. But do you see, America has had a lot of experimentation with tax-free savings accounts, is this part of the solution or irrelevant? ED PRESCOTT. It’s a big part of the solution, McGrattan and I estimated in our RES paper that it did increase the value of the stock market, because it reduced the tax on distributions from corporations to household, I think by about 50% in that those things got phased in in the ‘80’s and ‘90’s and that was a period in which the value to the stock market relative to GNP went way up. MARTIN WOLF. Do you see, this was the question, do you see any downside to that sort of move towards eliminating the taxation of a substantial part of income? ED PRESCOTT. The US has moved pretty much to savings accounts, even the federal government with the Thrift plan, in Michigan and Alaska and DC, have shifted away from the defined benefits to defined contributions, savings plans which are savings plans and not – now, there’s two types of these savings, one you do with post tax income, it´s called Roth IRA and then you don’t have to pay any taxes in the future, the other is you reduce your taxable income now and get it later, the two are equivalent. ED PRESCOTT. If you look at them - except in the limits, I guess, they have some small differences. I think this is a good development and I think people having their individual savings accounts helps sustain it and things become transparent, it´s dangerous in society when promises are made which cannot be honoured by the collective entity we set up, the government. MARTIN WOLF. So, Peter, why are they a terrible idea? PETER DIAMOND. I didn’t say they were a terrible idea. First of all I think corporate defined benefit plans, which a lot of people on the left are longing for the day of them, were always badly overrated. The set of risks associated with them, non-transparent risks, were very large. I think, when I first learned of them in the late ‘70’s, I thought they should be made illegal, because the fundamental premise driving them was a miscalculation of what they were worth to the workers. I think there is a need for tax-dated retirement savings, because when you do capital income taxation over repeated years, the tax wedge grows, that can’t be part of an optimal pattern. On the other hand, there’s no reason to do that for the very wealthy who are saving well beyond future retirement, they’re doing a different calculation. So we have a cap on it, and part of this issue is where should the cap be, on tax favouring, and I think the tax should not include going up without limit, it should be focused as part of a national savings encouragement system which is aimed at the bulk of the population and not the very well off. MARTIN WOLF. I think I’m supposed to end this, I thought it was just beginning to get quite interesting. I’m supposed in some sense to summarise this, the main point I take from this is two things. It was very good that we had politics in here, because we realised that absolutely first rate economists disagree absolutely fundamentally on incredibly important things like how to tax capital and savings, and that’s very good because it means that the subject remains live and relevant to policy and politics, which is I think the defining characteristic of this subject, why it interested me in the first place. So that was very, very good. I think the second thing I take away from this is, it comes back to where I started, there’s a tremendous amount of woe and agony and misery about the fact societies are getting older. But first it’s an incredible achievement and it´s one we have been achieving it appears for at least 10,000 years and it´s getting better faster. And the second thing that I get out of this is that the biggest cost explosion we are experiencing that we worry about in relationship to aging is in fact health costs rather than pensions, which are relatively easily manageable through life expectancy adjusted pension systems. And the health costs process is driven by very bad economics and technological innovations, and therefore it’s a completely different problem from the demographic problem to which it is so often attached. And that has the other final good product, I think particularly for the young people here, that maybe the relatively elderly people you see around here aren’t going to be the incredible burden that you fear just because they’re going to get older, that’s rather, I think rather encouraging, but you are going to have to manage health care systems in a very big way. Finally, Jim of course, as I would have expected, raised the sort of question to which, which I think is really a very nice question, which is how many people should there be? And he raised some very interesting ways of thinking about that. Now, the reason, that sounds a really very arcane question, but there are lots of governments around the world which have serious policies about how many people there should be, and he mentioned a number of them, Russia, France, but above all China. And the question of what governments think about and do about how many people there should be has the most profound effects on our society. So I think that’s a very, very deep and profound question which you can all go away and think about. I’ve enjoyed very much being here with this distinguished panel, and I hope you will thank them for their stimulating answers to these questions.

Panel Discussion (2011)

Panel "Demographic Change, Economics and Politics": Peter A. Diamond, Sir James A. Mirrlees, Christopher A. Pissarides, Edward C. Prescott (Chair: Martin Wolf, Financial Times)

Panel Discussion (2011)

Panel "Demographic Change, Economics and Politics": Peter A. Diamond, Sir James A. Mirrlees, Christopher A. Pissarides, Edward C. Prescott (Chair: Martin Wolf, Financial Times)

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